British Airways is closing in on its long-awaited merger with Iberia, the Spanish flag carrier. An annoucement could be made as early as Friday, according to Sky News, although sources last night cautioned that any deal could still fall through.

British Airways said last night that “talks were continuing”. Iberia refused to comment.

Under the terms of the potential deal, Willie Walsh, British Airways’ chief executive, is widely expected to become chief executive of the enlarged group and Iberia’s chariman, Antonio Vazquez Romero, would become chairman. It would be listed in London and Madrid and both the BA and Iberia brands would be retained. It is thought the headquarters could be in Spain rather than England.

A deal would cap 16 months of fraught negotiations in which the two sides have encountered many problems.

The airlines started merger talks in July 2008 in response to a severe reduction in passenger numbers.

Among the problems facing the two carriers is BA’s pension fund deficit, which is thought to be about £3 billion. The carriers have also struggled to agree to a corporate structure and how much each set of shareholders will own in the new company.

The deal could be announced when Iberia reports its results on Friday. Analysts expect the Spanish airline to report a nine-month operating loss of €320 million (£289 million) after aggressive cost cutting failed to offset falling air travel demand.

BA reported record losses last week and predicted revenue would slump by £1 billion this year but said business was stabilising and hinted at a decision on the proposed merger with Iberia “in the very near future”.

Separately, British Midland (bmi) may struggle to raise the £95 million in funding it needs to keep flying because potential buyers have become thin on the ground for its Heathrow landing slots. A number of the world’s leading airlines have expressed little or no interest in bmi’s firesale, even though slots at the world’s busiest international airport have traded for tens of millions of dollars apiece in the past.

The Derby-based airline said this week that it needed to raise £190 million in additional funding by the end of October next year to survive.

Lufthansa, the German flag carrier, which took control of bmi this year, has pledged £95 million in loans. The remainder is to come from the sale or lease of landing slots.

Bmi, which employs 4,800 people, said that it was in “significantly advanced talks with several airlines” to sell slots. However, this has come as a surprise to many of the obvious buyers. British Airways, Virgin Atlantic, Emirates and several other Gulf carriers are not thought to be in talks with bmi over its slots. The American carriers are also understood to have little interest because they are trying to conserve cash. Analysts speculated that bmi may get interest from an Asian carrier, such as Air China, but only if the slots are sold at a bargain price.

In the airline’s most recent accounts, its directors warned that uncertainty over the slot sale cast doubt on the company’s ability to continue as a going concern next year.

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